What do Stripe's liquidity options signal to startup employees?

When you think of a startup’s trajectory, you might envision progressively larger fundraising rounds culminating in an initial public offering (IPO). In reality, though, companies don’t always enjoy a smooth ride toward going public. Popular companies can still have down rounds, layoffs, and other hiccups. And they could remain private indefinitely while still becoming a mature company.

But if a company doesn’t move toward an IPO, where does that leave startup employees, who often receive substantial portions of their compensation in equity, such as incentive stock options (ISOs) or restricted stock units (RSUs)?

One example of a company weighing this question is Stripe.

Here, we’ll take a closer look at Stripe’s potential liquidity plans and what they may mean for employees both at Stripe and in the broader startup world.

What Are Stripe’s Liquidity Plans?

Payment processing software company Stripe has existed as a private company for more than a decade, reaching a peak valuation of $95 billion in 2021. While the company wasn’t spared from the tech tumble over the past year or so, it appears to remain in a relatively stable position as a private company, with The Wall Street Journal reporting in January 2023 that Stripe was seeking new funding at a valuation of $55-$60 billion.

However, Stripe faces a dilemma. Some early employees have expiring RSUs, reports The Information. Rather than let that compensation go to waste, Stripe is exploring three options over the next year, as The New York Times reports:

1. Go public via a direct listing, where existing shareholders sell stock directly to the public instead of the company issuing new shares
2. Engage in a tender offer, where other investors buy stock from existing shareholders, while the company remains private
3. Conduct a regular IPO, which could give employees a way to eventually sell shares but dilute equity and involve a lock-up period

What Might These Liquidity Options Mean for Employees?

Whether Stripe goes public or remains private following a tender offer, having some sort of liquidity event means that employees have a chance to cash out their equity or at least extend the timeline to consider what to do with their shares.

In a direct listing or an IPO, employees with expiring RSUs could cash out or potentially hang onto vested shares to sell at a later time.

Keep in mind that RSUs don’t expire the same way that stock options do. Stock options typically expire within 10 years. But an employee could exercise stock options and then hold on for a liquidity event.

RSUs, however, don’t have to be exercised by being purchased the way that options do. Once vested, the shares are generally yours to use as you see fit. However, companies might have expiration rules, such as the shares becoming void if the company doesn’t have a liquidity event within a certain timeframe.

So, in the case of Stripe, exploring different liquidity options could help employees find ways to realize the value of their equity, rather than letting it expire.

What Might the Stripe Situation Mean for Employees of Other Startups?

Depending on the particulars of your equity grant, you might face a similar situation where your RSUs or employee stock options are set to expire, but a liquidity event like a tender offer could give you a chance to sell. Or, after an IPO or direct listing, for example, you might have vested shares that become shares in a publicly traded company, so you can either sell or hold your shares as you see fit.

Ultimately, the specifics depend on your company and your unique equity situation. In general, though, Stripe’s exploration of liquidity events seems to signal that at least some private companies understand employees’ concerns about realizing the value of their private stock. Rather than letting RSUs or options expire, your company might help you find ways to sell your stock or extend your timeline to hold.

SpaceX, for example, engaged in a tender offer in December 2022. OpenAI is also similar considerations. These types of moves could signal to other startups the need to help employees find liquidity.

If your company does remain private, another option is to sell your shares to other investors through a private marketplace like Forge. Doing so means that employees may be able to turn something that has value on paper into real-world cash, while companies can remain private.

You generally need permission from your employer to sell shares through a secondary marketplace. As the Stripe situation demonstrates, keeping equity locked up — or worse, becoming worthless — can be damaging to employees. Instead, many companies want to reward employees so they can retain them and attract more high-quality candidates.